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The German economy has proven remarkably resilient in the face of recent crises. Unemployment has reached post- unification lows, reflecting ambitious reforms in the past decade and Germany’s status as a “safe haven”. The current account surplus remains large, although domestic demand has started contributing substantially to growth. However, Germany will face a number of challenges. Potential growth is estimated to fall on account of demographic changes over the next 20 years. The share of low-paying jobs has risen considerably. Public investment is low and government spending on key services to support inclusive growth, notably childcare, needs to rise further. On unchanged policies, targets for CO2 emission reductions will be missed. To address these issues, determined action is needed, building on the momentum of past reforms. Such action would also have positive international spillover effects on activity. The German banks have weathered the euro area crisis well but potential risks arise from the low interest-rate environment and large derivative exposures. These potential risks are aggravated by high leverage of the country’s largest banks and persistent perceptions of government guarantees to banks. Lending growth has fallen in real terms in recent years, reflecting weak demand. In some respects, the government has moved ahead of many other OECD countries with reforms to reduce risks in the financial sector. Nonetheless, further steps to make the banks more robust would improve incentives for banks to take advantage of low interest rates to finance strong, sustainable economic growth. Such steps should include reducing high leverage, ambitious implementation of EU requirements for the reform of resolution legislation and addressing governance problems in the public banking sector. The contribution of the services sector to value-added growth in Germany has been relatively small over the past 10 years. While export oriented manufacturing is exposed to international competition and responds with productivity-increasing innovation and human capital accumulation, service sector productivity is lagging. Competition often appears to be hindered by protection of incumbents. Reforming and deregulating the domestically oriented sectors, including network industries, crafts and professional services would release hidden growth potential and prove beneficial to the economy as a whole. It could also help strengthen domestic demand and make economic growth more balanced. Income inequality has not increased since 2004 and has remained lower than in most OECD countries. However, poverty risk has increasingly affected employees with relatively low employment protection or limited access to unemployment insurance, as well as many part-time and self-employed workers. The share of women working part-time is high. Youth who have not graduated from upper secondary education face poor lifetime income generating prospects. Education outcomes continue to depend strongly on socio-economic background. Continued efforts are needed to promote economic growth in a more inclusive manner. These efforts should include: enhancing labour market outcomes and upward income mobility among disadvantaged individuals; strengthening skills at the lower end of the skills distribution; revising the tax and benefit system to improve incentives and ensure efficient and well-targeted redistribution; and making health and old-age pension insurance more inclusive.The Secretariat’s draft report was prepared for the Committee by Andrés Fuentes Hutfilter and Andreas Kappeler as well as André Eid, seconded from the German Ministry of Economic Affairs and Energy, under the supervisionof Andreas Wörgötter. Research assistance was provided by Seung-Hee Koh. For further information please contact Germany Desk at the OECD Economics Department, e-mail eco.survey@oecd.org. or Mrs Caroline Tourrier: